Attracting younger clients to VCTs

But as more people are becoming aware of the need to start saving as soon as possible to secure a decent financial future for themselves, is the average age of VCT investors coming down?

For some, it seems to be, although it's not easy to quantify. George Bull, senior tax manager for RSM UK, comments: "The trend seems to be towards younger investors, although I can find no definitive information on this."

He cites a report for the then Inland Revenue back in April 2003, called Research into the Enterprise Investment Scheme and VCTs. This indicated that at the time:

• 20 per cent of VCT investors were 40 to 49 years old.
• 29 per cent were between 50 and 59.
• 45 per cent were 60 and over.

However, anecdotally, he acknowledges since then the average age of VCT investors seem to be falling. 

This is certainly the case for Alex Davies, chief executive of Wealth Club, who says his firm's youngest VCT client is 23 years old. "Looking at the wider demographic, 14 per cent of our clients investing in VCTs are under 40, while 31 per cent are under 50," he confirms.

Similar figures are cited by Stuart Veale, managing partner at Beringea: "We don't collate data on the mean or median age of investors but the age range is broad.

"In the last major share offer by ProVen VCT, the youngest investor was 22 and the oldest was 95."

The tax factor 

"The key factor in this is that if you are what can be described as remotely wealthy, then one by one, pretty much every simple and tax-efficient way of saving previously available to you has been made less attractive," says Mr Davies.

Pension taxation changes have also made people look further afield for tax-efficient investment options - especially those seeking yield. The Association of Investment Companies (AIC) states the average yield on a VCT is 6.7 per cent - far higher than the yield on the FTSE 100 or the FTSE All-Share, and certainly higher than cash or sovereign bonds. 

Jack Rose, head of tax-efficient investment at LGBR Capital, says: "Changes to pension taxation has broadened the investor base for VCTs - it has meant people are considering VCTs at an earlier stage than they might previously have done."

But beyond pensions, there has been a fast erosion of tax-efficient investment schemes in the UK.

One only has to think of the film schemes which 15 years ago seemed so popular and a great way to mitigate one's tax bill, and now are not only being cracked down on hard by HM Revenue and Customs (HMRC), but also landing people with big fines to pay to HMRC.

Changes to pension taxation has broadened the investor base for VCTs - it has meant people are considering VCTs at an earlier stage than they might previously have done. Jack Rose

Such schemes were popular not just with actors, comedians and footballers but also those who were working within the financial services sector, showing that even sophisticated investors and their advisers can make mistakes.

For example, earlier this year FTAdviser reported on the case of the incoming Financial Conduct Authority (FCA) chairman, Charles Randall, who admitted his error of judgement in investing in the Ingenious Film Partnership.

So when the government does get behind tax-efficient investments, such as VCTs and enterprise investment schemes (EIS), with the view to bolstering British business, this makes for a compelling reason for people to consider these as part of their overall tax planning.

Traditionally, tax planning has been the purview of the wealthiest in society, those who have maxed out their pension and Isa allowances (currently at £40,000 and £20,000 a year) and are now looking towards VCTs and EIS.

These have tended to be the older members of society. Darius McDermott, managing director of Chelsea Financial Services, comments: "Young people do not tend to have big tax bills and are less willing to invest in higher-risk businesses when they have to tie their money in for five years to get the tax breaks.

"There seems to be a bit more interest [in VCTs] from younger investors, as having the data more widely available on the internet has helped, but we find it is still mainly older investors."

Risk

Mr McDermott's point about tying money up in a VCT for five years - when younger people are more likely to need ready access for house deposits or when they start a family - is a key one, especially given the risk.

The AIC's communications director Annabel Brodie-Smith reiterates this point: "VCTs are more suitable for investors who are prepared to accept a high level of risk.

Clearly, the VCT sector has always been most attractive to those paying the highest rates of income tax. Chris Hutchinson

"VCTs invest in small, high-risk companies which could become household names in the future. The government offers generous tax relief if you subscribe to new VCT shares, but to qualify for this income tax relief, the investor must hold the VCT for a minimum of five years."

So while a younger investor is by no means not eligible to invest in VCTs, there may be lifestyle or other financial factors an adviser should discuss with younger clients considering making such investments, as they may not be aware of the tie-in for tax purposes or the more risky nature of the investment.

Jason Hollands, managing director of communications and business development for Tilney, also expresses caution over young people prioritising VCTs.

He says: "With the exception of City professionals, such as traders and hedge fund managers who earn significant bonuses and want to reduce their tax liabilities, we haven't seen a trend [in young people] seeking VCTs.

"VCTs are a niche and higher-risk product, and should really be used to augment more mainstream products, such as pensions and Isas, once those are maximised."

Mr Hollands adds: "Very few young people are in a position to maximise their annual Isa and pension allowances, which should rank ahead in their priorities."

Entrepreneurs

But with VCTs coming into their own as an interesting and compelling investment product in its own right, irrespective of the tax allowances, more people further down the wealth scale - and further down the age scale - are considering using VCTs.

The change may be slow, but it is a change that others have noted.

As Chris Hutchinson, manager of the Unicorn AIM VCT explains, it's not just the old, wealthy Brit who is benefiting from VCT investment but also younger, more financially savvy investors who are coming through the door.

"Clearly, the VCT sector has always been most attractive to those paying the highest rates of income tax," he says.

"In the past, this has meant the typical investor has been in their fifties or older. But in more recent years, the number of younger, financially successful entrepreneurs has grown rapidly, largely as a result of changes in technology, which have disrupted traditional business models."

This means there are many more people in the UK who have become wealthy at an earlier stage than would have been possible before the "internet revolution 20 years or so ago", he says.

Very few young people are in a position to maximise their annual Isa and pension allowances, which should rank ahead in their priorities. Jason Hollands

Younger entrepreneurs who are "typically very comfortable with technology" are also more likely to have a genuine interest in early-stage, technology-driven businesses, Mr Hutchinson says, which would make "today's VCTs particularly attractive to them".

Mr Bull agrees with this: "The November 2015 reforms mean that VCTs can no longer acquire an existing business, so VCTs are switching from management buy-outs to invest in younger, higher-risk businesses looking for capital.

"Such businesses may be based on new technology, and this may attract younger investors."

Investing in VCTs for their own sake

Clients do not have to be wealthy older people or cash-rich youthful entrepreneurs with a compendious lore of technology. According to Paul Latham, managing director of Octopus Investments, the types of British businesses that are now being targeted by VCT managers are attractive enough in their own right to make more people interested in VCTs.

He states: "People tend to think it is only the very wealthy and those looking to diversify their retirement planning portfolio who invest in VCTs, but this is simply not the case.

"We are seeing an increasing number of investors, in their 20s and 30s, investing in VCTs motivated by the attractive tax reliefs and the opportunity to back the businesses of tomorrow."

Moreover, the average initial investment into some VCTs has come down significantly: some VCTs accept initial investment amounts of £3,000 or £5,000, which a younger investor may be able to spare after they have maxed out any workplace pension or Isa contributions.

Long-term options

For Wealth Club's Mr Davies, the main attraction of VCT and EIS is that it is "one of the last few decent options left for wealthier investors of whatever age to save for their future".

This is because tax tinkering with pensions annual contribution allowances, changes to the lifetime allowance and a cut to the dividend tax allowance from £5,000 a year to £2,000 has made it tougher for investors.

Mr Davies explains: "If you save into a pension, you can probably put a lot less in. If you are a buy-to-let investor, you are probably now paying more tax.

"If you have investments outside of an Isa or self-invested personal pension (Sipp), you will be hit by the new dividend tax."

simoney.kyriakou@ft.com